American Electric Power: Buy the Drop

American Electric Power (AEP) shares are down more than 11% in 2015, but I believe that this is an opportunity for investors to buy shares in a company that’s expected to benefit from the growing demand for electricity in the U.S.

The company is focused on expanding its transmission business and is strategically controlling its operations and maintenance expenditures, which is why its earnings performance has been strong in the last two quarters.

What next?

Looking ahead, American Electric seems to be highly focused on diversifying its power generation base including power generated through coal or lignite, natural gas, hydro, wind, solar and pumped storage.

This planned diversification is believed to provide solid top line growth for the company.

Moreover, American Electric is witnessing notable industrial load growth in its shale gas counties, with 14% year-over-year growth. However, expansion of the oil and gas industry was negatively impacted by the weak oil prices, still other industrial segments in its service area are gaining from reduced fuel costs.

Moreover, American Electric has lined up aggressive investments for the future. Its capital spending projection for the period 2015 to 2017 includes overall non-GAAP capital and equity contributions of $4.4 billion, $3.8 billion, and $3.9 billion for 2015, 2016, and 2017, respectively. American Electric has also announced regulated generation investment, regulated distribution investment, and regulated transmission investment of $2.7 billion, $3.6 billion, and $4.8 billion, respectively.

As a result of these investments, American Electric seems well-positioned for long-term growth since it is strategically distributing its capital and equity investments across its power generation portfolio.

More importantly, American Electric is growing its energy portfolio to include renewable energy as well that comprises of wind, hydroelectric, solar, biomass and biodiesel while focused on lowering its carbon emissions. Thus, American Electric is focused on different areas in order to improve its financial performance and capture more of the end market going forward.

More positives

American Electric carries a strong dividend yield of 3.94%. The good thing is that its dividends have increased at an annual rate of 4.1%, and the trend will continue as the company targets a payout ratio of 60% to 70% of operating earnings. As of now, American Electric has declared 420 successive quarters of superior dividend growth.

Moreover, the consensus estimate among 24 investment analysts who cover American Electric Power indicates that the stock will do better than the market. This consensus rating has been maintained for more than three years now. Moreover, Deutsche Bank recently upgraded American Electric Power from Hold to buy with a price target of $62.40, primarily driven by solid financial results and its growth prospects.

Conclusion

All in all, American Electric is making the right moves to expand its business and benefit from the growing demand for electricity. Additionally, the fact that Freeport is increasing its investments in renewable energy is another positive that investors should consider. Thus, in my opinion, the weakness in American Electric’s shares so far this year is a good opportunity for investors to buy the stock for the long run.